Elliot vs Argentina is a domestic Argentine issue

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If you want to follow all the ins and outs of Elliott vs Argentina in the mainstream press, you’ll soon find something very interesting. It’s a US case, in a US court, which is very likely to have profound consequences for both US markets in general and for one of America’s most diplomatically important laws, the Foreign Sovereign Immunities Act. But to a first approximation, the US press simply hasn’t noticed.

Most US outlets have carried a single dry and dutiful report, buried on an inside page, somewhere; the NYT didn’t even manage that, relying instead on a wire report from the AP in Buenos Aires. The WSJ has not been much better, although its report is notable for getting notoriously reclusive fund manager David Martinez* on the record — a sign that if they put their mind to it, US journalists could really add some value here.

By contrast, the FT has been all over the story, in detail, from the very beginning, out of London and Buenos Aires. Alphaville’s Joseph Cotterill has created the invaluable Pari Passu Saga Series, the newspaper splashed the news all over its front page this morning, and the combination of Jude Webber in Buenos Aires and Robin Wigglesworth in London has proved to be incredibly powerful and astute. Even accounting for the Thanksgiving holiday in the US, the disparity is striking. The best US newspaper coverage — which has come, singlehandedly, from Michelle Celarier at the New York Post — doesn’t even come close to competing. (Michelle and I share more than an interest in sovereign debt: we’re both former correspondents for the UK’s Euromoney.)

But by far the most detailed and voluminous coverage has come from the Argentine press, which has been covering the New York court case in extreme detail. Every time that Judge Griesa releases an opinion, it’s immediately uploaded to a multitude of Argentine news sites, and thousands of Anglophone readers flock to download everything he has said, and argue about what it means. This story is huge in Argentina — and unlike the last time that Argentina defaulted, in 2001, everybody has the internet and is following what’s going on, in extreme detail, online.

Which makes the AP report that the NYT ran with particularly fascinating. Most of the time news stories are interesting when they tell you something you don’t know; in this case, we have a news story which is interesting because it tells us something which isn’t actually true at all.

As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976 to 1983. The military junta more than tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.

Sovereign debt is supposed to be paid no matter who runs a country, but President Fernández has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor, Néstor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.

In fact, Argentina’s world record was broken by Greece, but never mind that. Much more interesting is the way in which the AP’s Buenos Aires reporter, Michael Warren, is reflecting a very common view of things in Argentina — that Elliott’s debt is odious and illegitimate.

Note that Argentina itself, in Griesa’s courtroom, has never made this argument. Quite the opposite: Argentina has always held, at least in New York court, that Elliott’s debt is entirely legitimate, and indeed is just as legitimate as the debt held by exchange bondholders. It’s up to Argentina, as a sovereign nation, which creditors it pays and which it doesn’t — but Argentina, at least as a matter of law, has never denied that it owes Elliott the full amount it’s being asked to pay.

What’s more, the debt that Elliott holds was not, in any real sense, “forced onto the Argentines by dictators”, and the case is not “rooted in the bloody dictatorship that ruled from 1976 to 1983″. Yes, the junta ran up a lot of debts — and Argentina restructured those debts in its big Brady deal of 1992. By the time the junta-era debts had been restructured, Argentina’s debt was an entirely manageable 30% of GDP; even two years later, in 1994, it was just 31.4% of GDP. It was only in the late 1990s that the democratically-elected Argentine government of Carlos Menem started running up the country’s debts to unsustainable levels.

Menem, of course, was a Peronist, just like Cristina Fernández and her late husband — and so it would be hard for her to blame Argentina’s current predicament on him. Somehow, she has managed to persuade the Argentine public — and even AP reporters — that paying off Elliott would be tantamount to ratifying the actions of the military junta which lost power before most Argentines were even born.

All of which helps explain why absolutely everybody is convinced that given the choice between paying all of its creditors and paying none of them — the choice which Griesa is giving Argentina — Cristina will choose the latter. Even Mitu Gulati tells Christopher Spink that “Argentina is likely to default on the exchange bonds” — and Gulati is the frequent co-author of Lee Buchheit, of Cleary Gottlieb, which represents Argentina.

Essentially, there are two choices here. Argentina can somehow win its appeals; or it will end up defaulting on its exchange bonds. The outcome Griesa is trying to order — where Argentina pays its exchange bondholders and its holdouts, in full — is simply politically impossible in Argentina.

Of course, another Argentine default wouldn’t be the end of the story. It’s hard to pay bond coupons in dollars, even if the bonds are issued under Argentine law, without going through some US-based intermediaries — and Griesa could always try and intercept those payments if Argentina thumbs its nose at him and simply ignores his order. What’s more, Elliott Associates will, everybody believes, make a large amount of money in the CDS market if Argentina does default, and the Argentine government would love to stop that from happening, somehow. (They can’t prevent the fact that Elliott has already made a large sum in the CDS market, on a mark-to-market basis.)

And there’s a decent case to be made that Argentina’s debt is undervalued right now even if it does end up defaulting. So long as exchange bondholders are happy getting paid out of Argentina rather than New York, they will probably end up with every penny they’re owed — in dollars. There might well be an uncomfortable interregnum, but ultimately they’re more likely than not to get their money. So if you have a strong stomach, maybe the exchange bonds are a buy right here — precisely because many institutional investors don’t have strong stomachs, and have no desire to be holding onto defaulted sovereign debt.

In any case, in order to really understand what’s going on with Argentina’s bonds, you need to be at least as well versed in Argentine politics as you are in the intricacies of New York law and pari passu clauses. Judge Griesa might have a surprising amount of power. But Cristina Fernández has more.

*Martinez, one of the world’s most successful distressed debt investors, is siding against Elliott Associates in this case. Similarly, David Boies is siding with the exchange bondholders against Elliott, despite the fact that his son, also called David Boies, founded Straus & Boies with Michael Straus, who represented Elliott in its last major sovereign battle, against Peru. Boies is representing Gramercy Advisors, who also made their name as a vulture fund. This is a case where everybody is pretending to be highly principled — but ultimately, as ever, it’s all about financial self-interest.